Michigan enjoys its oil and gas bonanza -- for now

ByRon Scherer, Business and financial correspondent of The Christian Science MonitorSeptember 2, 1980

Traverse City, Mich.
— The auto industry may be in trouble in Michigan, but the oil industry is booming. Last year was a record year for the state as it produced some 35 million barrels of oil and 158,691,413 MCF (thousand cubic feet) of natural gas. In fact, with the oil fields producing over 100,000 barrels per day, hydrocarbon production became Michigan's largest "extractive" industry, surpassing iron ore mining.

The main part of the production came from a band stretching from Lake Michigan and Traverse City to the northeast corner of the state, bordering Lake Huron. In an area that is best known as the cherry capital of the state, it is not unusual to see oil rigs and pipelines snaking through the orchards. Cattle sometimes try to use the oil-field equipment to rub against and the smell of natural gas competes with the odor of sweet corn.

Although 1979 was a record year, and 1980 probably will be equally as good, there are some concerns among the industry about the future.

For example, the number of exploratory wells drilled is declining. Shell Oil , which has drilled more than half the total number of wells under production, now has only five rigs drilling in the area. That compares with 13 rigs in 1975 . "You can say the search has peaked" says Charles P. McRill, a production foreman for Shell in the Traverse City area.

And statewide the total number of wildcat and development wells drilled has declined from 550 in 1978 to 521 in 1979.

For the oil industry, an even worse sign is the declining success ratio. It has slipped from 50 percent of all wells drilled to 33 percent.

"The prime prospects have been tapped," says Mr. McRill, "and now only the marginal prospects are being explored."

The maturing of the oil fields will be a real blow to the state, which has been the largest beneficiary by far. Last year, for example, the state received about $20 million from the oil companies in severance taxes, privilege fees, lease rentals, and other fees. Even more important to the state, it received over $100 million in royalties since much of the drilling was done on land owned by the state.

Not only have the fees and royalties helped the state, while it is trying to cope with a decline in revenues because of the ailing auto industry, but it also has provided 10,000 new jobs. Roughnecks working the drilling rigs average $20, 000 per year, notes Mr. McRill, and skilled laborers make over $25,000 per year.

The industry and the state are not convinced that the oil boom has to end. In an area that the state's Division of Natural Resources (DNR) considers the most promising, the Pigeon River Country State Forest, a major controversy has been spawned.

A group of conservationists, spearheaded by the Western Michigan Environmental Action Council, brought a lawsuit against the state and the oil companies to prevent drilling in the forest. The environmentalists contended that the drilling would adversely impact elk, bear, and bobcats that roam the area.

In a complicated lawsuit that worked its way up to the Michigan Supreme Court in 1979, the environmentalists won a decision, halting drilling. Since then, legislation that would permit drilling in the Pigeon River forest has been working its way through the Michigan Legislature.

At stake, says the DNR, is 76.9 million barrels of oil, all of it on state lands. The Michigan Department of Management and Budget estimates that royalty income alone over a 10-year period could come to nearly $500 million for the state. Adding in other income, the state could derive $802 million if the oil reserve is developed. An additional 25,000 barrels of oil per day would be pumped.

The controversy is unusual because it also pits one conservation group against another. The Michigan United Conservation Clubs, located in Lansing, has been pressing for the drilling because the revenues from the drilling will go into a fund that will use the interest to buy recreational lands for the state.

The western Michigan group, meanwhile, has fought the new legislation, maintaining that it would exempt oil drilling on state lands from Michigan's environmental laws. Prof. Joe Sax, an environmentalist with the University of Michigan Law School, maintains that the legislation not only would repeal the state's environmental protection act, but also its oil and gas act.

In the meantime, the oil companies have been busy lobbying for the act, which has gained a considerable amount of support from newspaper editorials around the state. Rumors abound that compromises will be worked out by the time the state Legislature considers the bill this month.

The oil that lies trapped under Pigeon River forest is in structures much like those found around Traverse City. Small reefs, sometimes as tiny as 15 acres, lie 5,000 to 7,200 feet underground containing a cap of natural gas and layers of oil and water. Only because of advances in seismic technology was Shell able to locate the structures 11 years ago.

Drilling, says Richard Lanning a Shell drilling foreman, is tricky. The oil company has to miss the gas cap and perforate the oil layer. Then, the gas pressure naturally pushes the oil out of the hole. The reserve life of the reservoirs varies considerably depending on the gas pressure. Some wells have been producing for six or seven years while others last only two months.

The state figures the total proved reserves at the end of 1978 were 190 million barrels of oil and 1,768,581,000 MCF.

Recently, the main talk of the local farmers hasn't been the slowing exploration, but their reduced royalty payments. "They didn't realize the windfall profits tax applied to them as well as the big oil companies," explains Mr. McRill.